Bernie Schaeffer published the chart below on Sunday, which depicts Bernie’s view of the market's direction. Given YTD action -- the S&P 500 could be shaping up for a year like 2011, when the SPX corrected 20% from its spring high to the October low.
Conversely, reading its excellent weekly market summary, typically published late Friday afternoon, here is Bespoke's outlook as to the market’s expected direction for the rest of 2015:
- The range between the highest and lowest prices for the S&P 500 this year is 6.27%, so equity volatility is very low (my conclusion, not Bespoke’s).
- Per the Bespoke data, “in the 9 years where we’ve gone completely sideways through early May, the index has been higher over the remainder of the year 8 times, for an average gain of 4.76%.”
Two completely opposite stock market predictions, based on the same market action.
So what's the difference between 2011 and 2015? My guess is interest rates.
This is a weekly chart of the TNX or the CBOE 10-year Treasury yield contract.
A trade in yield above 2.25% and I think we see 2.50% quickly. A trade through 2.50% and we would trade above the downtrend line off the 2007 high yield over 5%, that wasn’t penetrated even in late 2013. Note where the “yield rally” stopped in 2013 i.e. right at the downtrend line.
The two stocks that would be sensitive to changes in interest rates or would benefit from higher interest rates -- both financial names -- are Chicago Merc (NASDAQ:CME)) and Charles Schwab (NYSE:SCHW).
Here is one final anecdotal point: a former portfolio manager I worked with in a prior life, and a guy I have high regard for personally and professionally, who currently manages about $2 billion in fixed income for an under-the-radar Chicago firm, responded to an email I had sent him bemoaning the fact that it appears that Treasuries are the only asset class immune to the “reversion to the mean” trade. His response – “we’ve been here before” – meaning we’ve seen back up in rates and they were temporary. That is definitely not a criticism, but it speaks to the complacency I see around interest rates and Treasuries.
The 10-year Treasury yield is trading above 2.25% as we speak.
Through 2.50% on the 10-year Treasury yield and I think it really will be “different this time”.